Wednesday, October 21, 2015

Notes on Taxes -- What is "Fair Share"?

This Facebook post links a National Review column by Thomas Sowell. It's the usual bait-and-switch argument misrepresenting the thrust of arguments, in this case an argument to correct the inequities of a tax code that has directed nearly all new wealth to those already at the very top of the wealth scale
Contrary to the way some people on the left conceive of the world, neither rich people nor poor people are inert blocks of wood, to be moved about like pieces on a chess board, to carry out some grand design from on high.

Even outright confiscations of people’s wealth, including whole industries in some countries, have failed to spread prosperity, and have even led to collapsing economies.
For future reference (lest I forget) this is my comment an a response lifted from the comments thread...

John Ballard -- About half of Americans have so little income they pay zero taxes, and about 80% of those who do pay tax take the standard deduction (not itemizing). In other words, all that offshore money Sowell mentions is not part of their lifestyles. I don't have a magic remedy, but I know there is a difference between INCOME (revenue from all sources) and WEALTH (revenue minus liabilities).

Until those two terms are no longer used interchangeably (and the word "rich" abandoned altogether) this is and will remain an incoherent discussion. Meantime, nearly every dollar of NEW WEALTH continues to be acquired by a small minority at the top of the population. Call that group anything you like, but until NEW wealth gets spread around, not much will change for the rest of us.

Richard L --  You mean new wealth like Steve Jobs? Like Mark Zuckerberg? New wealth gets spread around every day. Guys are coming up with innovative new ideas and getting rich. What democrats want is new wealth spread THEIR way. How is that going to work. Old money creates new wealth everyday too. Today's generation creates new ways to protect their return on capital. They have the right and responsibility to keep what is theirs and pass it down to subsequent generations. I don't get the idea that someone should benefit from wealth they didn't create.

JB -- To Richard L   No, I do NOT mean newly-created REVENUE streams. Those are a function of the economy as a whole. I mean that portion of already existing revenue streams (like those of the majority of ordinary people) for whom any new wealth -- or wealth accumulation, if you prefer -- is what remains after the expenses of living are taken into account. Or in business terms, what profit remains after all expenses are taken into account.

The business acronym EBITDA -- Earnings Before Taxes, Depreciation & Amortization -- illustrates my point, but pretend that someone's INCOME (from work, investments, gifts, gambling winnings, whatever) only exactly equals their lifestyle expenses. In that case there will be no wealth accumulation. Every dollar will be used to maintain the lifestyle. Even those with extreme earnings (sports and entertainment stars, lottery winners, entrepreneurs like the ones you mentioned) can very easily piss away all that revenue as fast as it comes in and the result will be zero wealth accumulation, or even going into debt. The biographies of movie stars and musicians have many such case studies -- a lifetime of vast revenue either stolen by agents, companies or unscrupulous family members. This is not a hard concept to grasp.

Consider the case of a newly-graduated medical doctor, lawyer or engineering super-star who lands a six-figure job with a ton of benefits. If that person has a big student debt, gets married and starts a family, signs a mortgage, buys a car or two and runs up credit card debts on top of all that -- that person may have a handsome income (revenue stream) but will not reach the "wealthy" category until all those liabilities are liquidated or at least balanced with accumulated assets. The home value may become more valuable than the original mortgage (equity), some kind of savings plan can be started (a good beginning), their might be generational assets from another source (inheritance, gifts, etc.), the kids may have funds being fed a little at a time, and some kind of retirement arrangements may be started (Roth, 401(k), etc.). But until the total of all those assets = all those liabilities, there will be zero wealth accumulation. Period.

I hope that explains what I mean by new wealth. Most of those challenges simply do not exist for the vast majority of ordinary people who will be lucky to reach retirement with anything more than the fragile social safety nets now in place -- Social Security, Medicare/Medicaid and Meals on Wheels.

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